Global investors wake up to cheap UK stocks as takeover activity rises

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Global investors “are finally waking up” to cheap London-listed stocks as takeover activity picks up, in a sign that Britain’s equity market could soon face a “flood” of investment, UK asset managers have said.

Matthew Beesley, chief executive of Jupiter Asset Management, said international investors were now turning to UK stocks because they were “the cheapest they have been in 50 years” and trading at a hefty discount to their US rivals.

“The [UK] market is for sale and there are signs that global investors are finally starting to wake up to this opportunity,” he told the Financial Times, pointing to increasing acquisition activity and interest from institutional investors in UK equity funds following a lengthy period of outflows.

The rise in deal activity around UK companies, such as Australian miner BHP’s bid for London-listed rival Anglo American and Daniel Křetínský’s improved offer for Royal Mail’s parent company, should provide a boost to domestic stock prices, he added. The value of offers for London-listed companies this year has hit the highest level since 2018.

Beesley’s comments come as the FTSE 100 index reached another record high on Wednesday, having risen nearly 10 per cent year to date, as investors search for value opportunities and as the UK economy pulls out of recession.

The resurgence of the FTSE 100 over the past few weeks follows a challenging period for the UK stock market. Analysts at Citi said earlier this year that the shrinking of the UK equity market accelerated “to a record pace in 2022”. The country has also suffered from a string of homegrown companies, such as Cambridge-based chipmaker Arm, opting to list in the US to fetch higher valuations.

But fund managers believe that cheap valuations combined with an improved economic outlook and an uptick in deals will boost UK stocks and attract further investment.

“International investors are looking more at the UK as a tactical play, it’s where they see value,” said John Ions, chief executive of Liontrust.

Jupiter’s Beesley said that if the UK market remained cheap, then the “trickle of M&A activity we’ve seen so far in 2024 could easily become a flood in 2025”.

Nick Train, co-founder of investment boutique Lindsell Train, noted that “things can’t stay cheap forever” in the UK equity market. Speaking at the Frostrow Capital conference in London earlier this month, Train said the increasing number and size of bids for UK companies has helped lift domestic stocks out of a bear market. “In the end, capitalism abhors a vacuum,” he said.

Other fund managers pointed to the rise in share buybacks, when companies use excess capital to purchase their stock.

James Lowen and Clive Beagles, fund managers at JO Hambro Capital Management, said the increase in companies buying their shares was among the “early warning signs” of a stock market revival, noting that some large companies, such as Barclays, had “substantial” buyback plans.

“It is hard to know what the trigger will be in the UK but an increasingly likely divergence from US interest rates would not be a bad guess,” they said. “When the breaking point comes, the reaction is likely to be rapid”, noting that the UK stock market could see a “flood” of investment.